US small caps at key level as Iran, crude and rates converge

• Iran headlines dictating the outlook for energy and rates
• Russell 2000 acting as a proxy for the US economic outlook
• 2560 a key level to watch this week

Rusell rebounds as yields, energy decline

The Russell 2000 has rebounded in recent days on the back of declines in energy prices and Treasury yields, reinforcing that it remains a high-beta play on sentiment towards the US economic outlook, rather than simply a bet on AI like some of the larger cap US indices.

Source: Tradingview

You can see that in the correlation matrix above, which tracks the index’s movements against a range of economic and market indicators over the past week, month and quarter. While a mild inverse correlation has been seen with WTI crude futures and Henry Hub natural gas over much of the past month, it’s the strengthening relationship with US Treasury yields that stands out this week. Reinforcing its highly speculative nature, the Russell also continues to demonstrate a strong inverse relationship with US stock and bond volatility measures.

It remains a rates-linked, sentiment-driven index to trade.

2560 in focus

Source: Tradingview

As a result of the latest rebound, the price has gravitated back towards 2560, a former support level that’s now acting as resistance. Its proximity means it can be used for risk management when initiating trades, allowing for a stop to be placed on the opposite side of entry.

If the price remains capped beneath 2560, shorts could be set with a stop above, targeting the 200DMA initially or, beyond that, support at 2400. Alternatively, if we see a break above 2560, longs could be set with a stop below, targeting the 50DMA initially, with the April 2025 uptrend and 2680 other options before the record high of 2737 set in January.

The message from the oscillators is more neutral than bearish when it comes to directional bias. RSI (14) sits marginally beneath 50 and has been grinding higher, while MACD has crossed the signal line from below but remains in negative territory. With no clear evidence that bulls or bears are gaining the upper hand, it’s a reminder to keep an open mind when assessing potential setups.

I have no strong view on near-term directional risks given how fluid headlines relating to the Iran war remain, but positive news will likely benefit the Russell, or weigh significantly if tensions escalate again, given the linkages between energy prices, the interest rate outlook and, eventually, economic growth.